Abstract Hedgehog (Hh) signal transduction regulates a wide variety of developmental processes, ranging from the controlling of Drosophila embryonic segment polarity to the patterning of developing neural tube, axial skeleton, limbs, lung, skin, hair and teeth in mammals. In developing embryos, the Hh signal acts as a morphogen to orchestrate cell fate decisions and pattern formation. In postnatal tissues, Hh protein is a powerful, but transient mitogen that controls cell proliferation. Thus, Hh signaling must be temporally and spatially controlled in order to achieve proper development. Misregulation of Hh signaling in humans results in various forms of birth defects, including holoprosencephaly, polydactyly, spina bifida, and heart and skeletal malformations. On the other hand, failure of normal restraints in Hh mitogenic activity has been associated with up to 25% of tumors in humans, including basal cell carcinoma and medulloblastoma. Therefore, studies of how Hh signaling is transduced would have widespread implications for our understanding of both normal development and tumor formation. The long-term goals of our research are to dissect the molecular and cellular machineries required to precisely control Hh signaling activity. In this proposal, we are taking advantage of powerful Drosophila genetics, in combination with biochemical and cell biological approaches, to investigate the complex role of reversible phosphorylation in the Hh signal transduction. We discovered recently that protein phosphatase 2A (PP2A) has an opposing role in modulating Hh signaling at multiple levels. PP2A substrate specificity is conferred by its associated variable regulatory subunits. We subsequently identified that Widerborst (Wdb), which encodes a specific PP2A regulatory subunit, is the negative regulator for Hh signaling. The focus of this proposal is to study the molecular and cellular mechanisms by which PP2A utilizes different regulatory subunits to control the reversible phosphorylation of different cellular targets for distinct Hh signaling outcomes in Drosophila development. This objective will be achieved by the following specific aims: 1) Determine the role of PP2A in negatively regulating Smo trafficking and Hh signaling; 2) Elucidate the mechanisms underlying the mutual regulation of Wdb and Hh signaling; 3) Define the role of PP2A in regulating the other key components in Hh signaling. Given that Hh signaling is highly conserved from insects to humans, and as PP2A itself is a strong tumor suppressor for many forms of cancer, our studies of the normal physiological roles of PP2A, in a relatively simple genetic model system, are anticipated to provide new insights into the mechanisms of how Hh signaling is precisely modulated by reversible phosphorylation, which will shed light on the role of PP2A as an effective therapeutic agent to prevent or treat Hh-related diseases in vertebrates.